With the consumer price index rising at the fastest pace in four decades, protection against inflation is a top priority for investors. And sometimes the best defense is a strong attack.
A battle plan is to create income that keeps pace with inflation.
For this strategy, we were looking for closed-end funds that are currently distributing more than 8% and also yielding more than 8% over the last five years. This should be more or less in line with the CPI, which rose 8.5% from a year ago in March, a reading that many economists believe will mark a top-up rate in prices.
Not paying too much is another smart tackle under inflation, so we stuck to funds that traded at a discount to intrinsic value. Finally, we discarded funds that had more than insignificant negative (below 1%) negative returns over the past volatile year. Most on the list had positive returns during that period.
We return to the closed-end fund market because this is where the biggest returns are available, primarily because of their leverage. Using borrowed money can be a double-edged sword that increases returns but also increases risk, especially in periods of rising interest rates that we are now experiencing. Closed-end funds also have the option to buy assets at a discount, which can provide a safety margin on the downside and potential for appreciation if the discounts are narrowed.
The cheapest and easiest way to keep up with inflation is certainly with I-bonds, US savings bonds with returns indexed to inflation. They are currently yielding a yield of 7.12% and are set to rise to 9.6% as of May based on the rise in CPI over the past six months.
But there are catches: I-bonds are limited to $ 10,000 per share. person annual purchases in most cases, which would hardly affect a seven-digit portfolio that is not atypical of Barrons readers. You can also not redeem I-bonds for a year and will be fined a quarter of the interest if you repay them in less than five years.
Their tradable cousins, Treasury Inflation Protected Securities, failed to live up to their name by protecting investors from the effects of rising inflation this year. TIPS suffered from the rise in real interest rates (what is left over after inflation), where the 10-year maturity moved to a negative interest rate of 0.15% from below minus 1% at the turn of the year. As with any bond, higher (or less negative) returns translate into lower prices.
iShares TIPS Bond exchange traded fund
(ticker: TIP) had a negative return of 4.8% until April 8, according to Morningstar, while
Quadratic Interest Rate Volatility and Inflation Hedge ETF
(IVOL) had a negative year-to-date return of 4.2%.
For a more active approach to being at the forefront of inflation, we offer these seven funds that pay over 8% now and have given at least as much back over the last five years.
|Fund / Ticker||Yield||Discount||return|
|Virtus AllianzGI Diversified Income & Convertible / ACV||8.96%||-7.49%||17.74%|
|Calamos Cabriolet & High Income / CHY||8.93||-1.47||14.21|
|Calamos Convertible Opportunities & Income / CHI||8.99||-2.01||13.53|
|Advent Cabriolet & Income / AVK||9.51||-7.21||11.14|
|Cohen & Steers Closed-End Opportunity / FOF||8.35||-3.62||9.54|
|BlackRock Corporate High Yield / HYT||8.83||-3.46||8.27|
|BlackRock Multi-Sector Income / BIT||9.01||-1.08||8.00|
Note: Data per. April 8.
Sources: Foundation website; cefconnect.com; Morning star.
What stands out is that the first four names on the list are all funds that concentrate on convertible securities. Convertibles have hybrid characteristics that capture much of the return potential for equities with some risk mitigation from bonds.
The top of the screen is
Virtus AllianzGI Diversified Income & Convertible Fund
(ACV). It shares the same management team as the AllianzGI Convertible Open-End Mutual Fund (ANZAX), which was unveiled last year in Barrons for having beaten the stock market in the previous 25 years.
The next two funds share the name Calamos, which specializes in convertibles. That
Advents Convertible & Income Fund
was also involved in Barrons last year.
Cohen & Steers Closed-End Opportunity Fund
(FOF) is a fund of other closed-end funds that seeks to capture opportunities across the sector.
Finally, two BlackRock bond funds are taking different grips on fixed income investments. As the name suggests, is
BlackRock Corporate High Yield Fund
(HYT) concentrates on investment securities below investment grade.
BlackRock Multi-Sector Income Trust
(BIT) also has its largest sector allocation in high-yield companies, it also spreads to mortgages, other securitized assets, foreign developed and emerging markets, investment-grade companies and variable-rate bank loans. Along with the sector diversification, the fund has apparently also hedged the portfolio’s risk from rising interest rates. According to the fund’s website, BIT has an effective duration of negative 0.05 years; duration is a measure of a portfolio’s sensitivity to interest rate changes.
This list offers a menu with various choices of closed-end funds with high current income and has been shown to provide high returns in the long run. As with any screen, it is a starting point for investors to dive further into them.
Write to Randall W. Forsyth at email@example.com